EIOPA consults on the capital treatment of insurers’ direct exposure to central clearing counterparties in the standard formula

The European Insurance and Occupational Pensions Authority (EIOPA) launched today a public consultation on the capital requirement treatment of insurers’ direct exposure to qualified central counterparties (CCPs) within the standard formula. Stakeholders are invited to provide their comments by 23 October 2024.

The Consultation Paper notes that (re)insures in the European Economic Area (EEA) have up until recently only used central clearing facilities indirectly as clients (i.e. through the intermediation of a clearing member) for their derivatives transactions. While Solvency II does prescribe a specific treatment for these indirect arrangements, direct exposures to CCPs have not been accounted for and as such would be treated as bilateral exposure, resulting in higher capital requirements.

Although there are no EEA (re)insurers at present with known traditional direct exposures to CCPs – as such a set-up may run counter to national law in certain Member States – clearing houses have evolved their access models. Under the so-called ‘sponsored model’, (re)insurers can now become direct members of CCPs with a sponsor handling default fund contributions and default management obligations on their behalf. 

EIOPA assessed these developments together with the implications of different access models on insurers’ risk exposures, liquidity needs and the complexity of their risk assessment calculations. The Consultation Paper proposes three policy options:

1. no change to the current regime (i.e. no recognition of the risk specificities of new access models and direct exposures)
2. extending the treatment of indirect exposures to direct exposures (i.e. more risk sensitivity but without capturing the particularities of default fund contributions)
3. further aligning the treatment of default fund contributions with the Capital Requirements Regulation – EIOPA’s preferred option as it also extends risks sensitivity to default fund payments.

Read the Consultation Paper

Consultation process

EIOPA invites stakeholders provide their feedback on the Consultation Paper and the draft advice therein by responding to the questions via the online survey no later than 23 October 2024. Responses will be published on EIOPA’s website unless otherwise requested.

Respond to the Consultation

Notes and next steps

Central counterparties are financial institutions that play a crucial role in the global financial system. They act as intermediaries in the settlement of transactions involving derivatives, securities and other financial instruments. By centralizing the clearing process, they simplify financial transactions through the netting of bilateral exposures and significantly reduce counterparty and settlement risks.

The public consultation on this topic is a response to the European Commission’s request for EIOPA’s technical advice. Following the consultation, EIOPA will consider the points raised by stakeholders and prepare a final advice to be submitted to the European Commission by 31 January 2025.